Tackling 'disturbing' tax evasion and avoidance
by Ian Pretty and Alexandre Negadi
23 May 2012
With budgets squeezed like never before and the eurozone in crisis, every euro has to work doubly hard, but first Europe's revenue agencies need get to grips with a critical tax collection challenge
It goes without saying that tax is a crucial revenue stream for national governments across Europe. However, while many public agencies have already established processes for compliance and enforcement, a combination of tax avoidance and error is still costing hundreds of billions of euros in lost revenues for citizens every year.
In France in 2010 the tax and customs offices, DGFIP, reported a 3.5 per cent increase in detected fraud, equivalent to €97m, bringing the total amount of revenue lost to fraud to €2.8bn that year. In the United Kingdom this year, tax avoidance schemes operated by big companies have made headline news, with the UK treasury talking about "aggressive" and "highly abusive" tax shelters. More broadly, governments are struggling to pay their public debts. All of this has re-opened the debate on the importance of efficient and accurate tax collection.
The billions lost in uncollected tax equates to billions that cannot be spent on public services. So what is going wrong and how can the problem be tackled? The tax gap – the difference between the amount collected and the amount that should be collected – is due to avoidance on the part of the taxpayer, error by the agencies themselves and outright criminality. Behind these factors lie social and technological developments. For example, physical mobility, both at national and international levels, makes it more difficult for agencies to correctly assess liabilities or track taxpayers. Then there is the availability of public sector online channels that is making it easier and cheaper for criminals to target tax agencies from anywhere in the world.
While individuals can deliberately omit to report income, non-payment can also be due to errors, especially administrative errors within the tax organisation or submission of inaccurate information without the declaring taxpayer being aware. A lack of good quality data and poor data management combine to prevent agencies gaining a clear picture of who is paying what, who is not, and what they should be paying. All of the above paints a disturbing picture, but there are ways to tackle the problem. In a recently published paper on tax error and avoidance, Capgemini looks at how to protect tax yield with a focus on detection and prevention. The paper argues that agencies need to adopt a targeted and holistic approach that brings together prevention and cure.
Technology combined with the evolution of existing business processes can provide solutions to detect evasion and act on both prevention – that is, stopping avoidance and error at the outset – and cure, meaning tackling fraudsters and error once they have been identified. Any solution should evolve constantly to fight fraudsters who are increasingly skilful and well-informed. A holistic approach at a national level allows inter-agency cooperation and enables a single view of the customer, which allows taxpayers to comply with their obligations and tax agencies to effectively manage their compliance regimes.
Sophisticated fraud detection systems are already part of the solution for a number of government agencies. These build on the expertise of tax inspectors and give them the tools and methods they need to make the whole process of tax collection cost-effective and efficient. The way in which data is used is also key. Successful management of avoidance depends on effective gathering and analysis of data. Investment in the right tools allows collected data to be managed and modelled so that fraudsters can be tracked. Alerts can be generated, suspicious cases analysed using available data and potential improvements identified.
At the same time, further measures should be built around multiple independent defences against evasion, including identity management, risk profiling, watch-lists, and advanced business and transaction rules. Tax agencies need processes that do not just make it easy for citizens to understand their obligations and comply with the rules, but also make it difficult for them not to comply. Above all, systems must be flexible enough to allow prevention and detection strategies and business rules to change regularly, so that agencies are not outmanoeuvred by the constantly evolving tactics of tax evaders.
This combination of process change and technology evolution is evident in the most effective tax agencies. Their systems and processes have already been modernised to maximise yield by improving compliance.
Ian Pretty is global tax and welfare lead, and Alexandre Negadi is global yield protection lead, at the management and IT consultancy firm Capgemini
It goes without saying that tax is a crucial revenue stream for national governments across Europe. However, while many public agencies have already established processes for compliance and enforcement, a combination of tax avoidance and error is still costing hundreds of billions of euros in lost revenues for citizens every year.
In France in 2010 the tax and customs offices, DGFIP, reported a 3.5 per cent increase in detected fraud, equivalent to €97m, bringing the total amount of revenue lost to fraud to €2.8bn that year. In the United Kingdom this year, tax avoidance schemes operated by big companies have made headline news, with the UK treasury talking about "aggressive" and "highly abusive" tax shelters. More broadly, governments are struggling to pay their public debts. All of this has re-opened the debate on the importance of efficient and accurate tax collection.
The billions lost in uncollected tax equates to billions that cannot be spent on public services. So what is going wrong and how can the problem be tackled? The tax gap – the difference between the amount collected and the amount that should be collected – is due to avoidance on the part of the taxpayer, error by the agencies themselves and outright criminality. Behind these factors lie social and technological developments. For example, physical mobility, both at national and international levels, makes it more difficult for agencies to correctly assess liabilities or track taxpayers. Then there is the availability of public sector online channels that is making it easier and cheaper for criminals to target tax agencies from anywhere in the world.
While individuals can deliberately omit to report income, non-payment can also be due to errors, especially administrative errors within the tax organisation or submission of inaccurate information without the declaring taxpayer being aware. A lack of good quality data and poor data management combine to prevent agencies gaining a clear picture of who is paying what, who is not, and what they should be paying. All of the above paints a disturbing picture, but there are ways to tackle the problem. In a recently published paper on tax error and avoidance, Capgemini looks at how to protect tax yield with a focus on detection and prevention. The paper argues that agencies need to adopt a targeted and holistic approach that brings together prevention and cure.
Technology combined with the evolution of existing business processes can provide solutions to detect evasion and act on both prevention – that is, stopping avoidance and error at the outset – and cure, meaning tackling fraudsters and error once they have been identified. Any solution should evolve constantly to fight fraudsters who are increasingly skilful and well-informed. A holistic approach at a national level allows inter-agency cooperation and enables a single view of the customer, which allows taxpayers to comply with their obligations and tax agencies to effectively manage their compliance regimes.
Sophisticated fraud detection systems are already part of the solution for a number of government agencies. These build on the expertise of tax inspectors and give them the tools and methods they need to make the whole process of tax collection cost-effective and efficient. The way in which data is used is also key. Successful management of avoidance depends on effective gathering and analysis of data. Investment in the right tools allows collected data to be managed and modelled so that fraudsters can be tracked. Alerts can be generated, suspicious cases analysed using available data and potential improvements identified.
At the same time, further measures should be built around multiple independent defences against evasion, including identity management, risk profiling, watch-lists, and advanced business and transaction rules. Tax agencies need processes that do not just make it easy for citizens to understand their obligations and comply with the rules, but also make it difficult for them not to comply. Above all, systems must be flexible enough to allow prevention and detection strategies and business rules to change regularly, so that agencies are not outmanoeuvred by the constantly evolving tactics of tax evaders.
This combination of process change and technology evolution is evident in the most effective tax agencies. Their systems and processes have already been modernised to maximise yield by improving compliance.
Ian Pretty is global tax and welfare lead, and Alexandre Negadi is global yield protection lead, at the management and IT consultancy firm Capgemini
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